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$27 million Silicon Valley insider-trading ring busted, feds say

Wire reports

Posted:
03/27/2013 06:39:54 AM PDT

Updated:
03/27/2013 06:40:19 AM PDT

The former chief information officer for a technology company and an analyst for a Bay Area hedge fund were arrested Tuesday in a $27 million insider trading case that prosecutors say involved several Silicon Valley companies.

Federal authorities arrested David Riley, 47, a former vice president at Santa Clara-based Foundry Networks, which made networking hardware before it was acquired by larger San Jose rival Brocade Communications Systems for about $3 billion in December 2008; and analyst Matthew Teeple, 41, of San Clemente. Each was charged in federal court in Manhattan with conspiracy to commit securities fraud and three counts of securities fraud. If convicted, each could face up to 65 years in prison.

Prosecutors said Teeple worked for an investment advisory firm hired by a family of hedge funds in San Francisco when Riley told him on July 16, 2008, about the pending acquisition of Foundry by Brocade. The deal was publicly announced five days later. Within two hours of the call, Teeple telephoned an investment adviser, who began purchasing a large amount of Foundry stock even before he got off the phone, prosecutors said.

Teeple was an analyst at Artis Capital Management, a San Francisco-based hedge fund launched in 2001 that invests mainly in public technology companies, according to people familiar with the matter. Artis is not named in court papers made public Tuesday about the latest criminal charges.

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Launched in 2001 by Stuart Peterson, Artis is known for having co-invested alongside Sequoia Capital in an $8 million round of financing in video-sharing website YouTube, before it was sold to Mountain View search giant Google (GOOG) for $1.65 billion in 2006.

"Artis has been cooperating fully with the government's investigation into this matter and has been advised by the U.S. Attorney's Office that the firm is a witness in the investigation," Bill McBride, a spokesman for the firm, wrote in an email.

The arrests are the latest in a widespread government crackdown on insider trading in recent years. Since October 2009, the Manhattan U.S. Attorney's Office has charged at least 80 people, of whom at least 72 have been convicted or pleaded guilty.

U.S. Attorney Preet Bharara said Riley and Teeple, who are friends, engaged in a "high-stakes game that has repeatedly proven to be unwinnable." He added that the case shows that "the ranks of privileged professionals who behave as if they are above the law continue to swell."

George S. Canellos, acting director of the Securities and Exchange Commission, which filed civil charges, said Riley "was entrusted with Foundry's most valuable secrets, but betrayed his company and set off an explosive chain reaction of illegal tips from friend to friend for illicit profits."

Authorities said Teeple also provided information about Brocade's plans to acquire Foundry to two acquaintances, including John Johnson, 46, a Denver-based investment adviser who made $136,000 illegally with the tip. He pleaded guilty this month to conspiracy and securities fraud charges.

Johnson is also the chief investment officer of the Wyoming Retirement System, which he joined as a senior investment officer in 2010, after the allegations in the complaint. The pension fund on Tuesday relieved him of all his investment and administrative responsibilities pending further review, according to Tom Williams, executive director.

Prosecutors said Teeple had also leaked information to Karl Motey, a California technology consultant who has pleaded guilty in the probe and been cooperating with prosecutors, the government said. Motey avoided prison time at his sentencing in February, at which a federal judge called him "a particularly impressive cooperator." He was ordered to submit $40,000 and serve a year of supervised release for conspiracy and securities fraud.

Motey kept a notebook "he often used to memorialize conversations he had with various individuals, including Teeple," the complaint states. Motey told investigators that a July 18, 2008, entry summarized a conversation in which Teeple explained that the Foundry acquisition might happen at $2.9 billion, according to the complaint.

Teeple also provided information about Sunnyvale-based Palm to Motey and Riley in exchange for the inside information on Foundry, according to the complaint.

In a June 15, 2009, telephone call that Motey recorded, Teeple said his firm owned "like 12 million shares" of the device maker, and that it was "gonna be a monster for a while."

When Motey asked Teeple where in Palm his contacts were, he said "one guy is in dev and then, one guy is kind of a, senior marketing guy," according to the complaint.

Teeple was arrested Tuesday in San Clemente, and Riley was arrested in San Jose. Each was awaiting initial court appearances in California on the charges, which were filed in New York.

Nathan Hochman, Teeple's lawyer, said: "Mr. Teeple intends to vigorously defend himself against the government allegations."